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In: Accounting

5.) On January 1, 2017, Vancouver Corporation paid $400,000 to purchase 40% of the outstanding voting...

5.) On January 1, 2017, Vancouver Corporation paid $400,000 to purchase 40% of the outstanding voting stock of Montreal Corporation. The equity method is used to account for the investment. The following data relate to this investment.
2017
∙ Dividends received from Montreal Corporation amounted to $20,000.
∙ Net income reported by Montreal Corporation was $200,000.
∙ Current market value of Montreal Corporation investment on December 31, 2017, was $700,000. 2018
∙ Dividends received from Montreal Corporation amounted to $30,000.
∙ Net income reported by Montreal Corporation was $300,000.
∙ Current market value of English Court Corporation investment on December 31, 2018, was $860,000.
∙ The investment was sold on December 31, 2017, for $830,000.
Prepare all journal entries for 2017 and 2018 relating to Vancouver Corporation's investment in Montreal Corporation

Solutions

Expert Solution

Solution:

Journal Entries for 2017 and 2018:

2017:

Date General Journal Debit Credit
1/1/2017 Equity Investment $          400,000
Cash $         400,000
[To record equity investment made]
2017 Cash $            20,000
Equity Investment $            20,000
[To record Dividend]
2017 Equity Investment [200000*40%] $            80,000
Equity Income $            80,000
[To record revenue]

2018:

Date General Journal Debit Credit
2018 Cash $            30,000
Equity Investment $            30,000
[To record Dividend]
2018 Equity Investment [300000*40%] $          120,000
Equity Income $         120,000
[To record equity income]

Sale Entry on December 31,2017 for $ 830,000:

Date General Journal Debit Credit
31/12/2017 Cash $          830,000
Equity Investment [Note:1] $         460,000
Gain on sale of Investment [830000-460000] $         370,000
[To record sale of investment]

Notes:

1) Calculation:

Equity Investment $                     400,000
Add: Net Income $                       80,000
Less: Dividend $                     (20,000)
Total Value @ 40% shares as on 31/12/2017 $                     460,000

2) No need to consider current market value at year end under equity method.So, no journal entry required.

3) It is assumed that sale of investment on 31/12/2017 is independent of 2018 transactions.

ekkarill92 answered 1 year ago
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